Thursday, December 30, 2010

Ronald Coase & Externalities


Yesterday was the 100th birthday of Ronald Coase who gave us the Coase Theorem.  I missed it (for which I apologize), but EconGirl, Jodi Biggs, did not. She put up a truly superb post explaining Coase’s importance and providing a great example of the Coase Theorem at work. 

I suggest you add this to your arsenal for discussion of externalities. It is clear. It is interesting. And it is real. And it’s hard to find examples that meet all those requirements.

4 comments:

Economists Do It With Models said...

I can't believe you left out a mention of my superb Photoshop skills. :)

Tim Schilling said...

My apologies. They are indeed superb. ;)

Clay said...

So is Coase saying that out of the two options, used as an example in the article, the most economically efficient option is that the power company pays nothing because we assume that they have the right to be loud?
This topic seems to also be more micro-economics. Is there a macro-economics example of this?

Tim Schilling said...

Not quite. The Coase Theorem states that the best solution often involves an agreement between the affected parties. In this case, the power-generating firm could negotiate deals with the individuals without the government getting invovled.